Why is the nominal interest rate (and not the yield) used to calculate the purchase price?
It isn’t used to determine price.
I’m not sure what you mean.
Do you have an example?
Section 4.1.1 of Working Capital Management.
Purchase price = $1,000,000 - [(0.05 (nominal rate) x (1/12) x $1,000,000)] = $995,833.33
Aha!
You’re talking about T-bills!
A T-bill is priced using a bank discount rate, unlike . . . well . . . every other bond out there.
Review BDR in quant.
(By the way, some of the stuff on bonds in Corporate Finance is just plain weird. Their definition of Bond Equivalent Yield, for example, makes no sense whatsoever.)
That gave me a little headache when I encounter those two formulas in different books…
Thanks for the heads up!
You’re quite welcome.